E-Commerce Report: To tax or not to tax, online

CBS.MarketWatch.com

SAN FRANCISCO (CBS.MW) -- Though the debate at the opening meeting Tuesday of the Advisory Commission on Electronic Commerce centered around international electronic commerce taxation, many members see it as a local issue.

The two-day meeting in San Francisco, chaired by Virginia Governor James Gilmore, is a step toward a policy advisory statement on the taxation of e-commerce.

The committee was created in 1998 as part of a three-year moratorium on new e-commerce taxation from the Internet Tax Freedom Act passed by the U.S. House of Representatives.

Tuesday's kick-off meeting in San Francisco was devoted to international tax and tariff issues. Much of the meeting was spent in a question-and-answer session with European representatives Andre Marsland of the 29-nation Organization for Economic Cooperation and Development and Michel Aujean of the European Commission, who argued in effect that e-commerce doesn't need to be exempted from tax laws.

"Taxation should be equitable between e-commerce and regular commerce," Aujean told the commission.

However, Aujean conceded that a revised approach to the online taxation of services vs. goods would have to be taken. "We certainly have to update our system for services," explained Aujean.

Marsland said that European businesses should be able to effectively self-assess their tax issues in the case of business-to-business e-commerce.

Addressing the panel, commission member David Pottruck, Co-CEO and President of Schwab Corp.
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said it's important to remember that the bulk of today's transactions are for tangible goods, not purely digital products which present policy problems because their trade is in a nascent stage. "We are going to get to continue to live in a world of physical objects for some time," Pottruck said.

The commission is set to finish its work and submit its recommendations to Congress by April 2000, precluding a final meeting in Dallas.

Waitt weighs in

The commission is visiting issues which have been touched on since the proliferation of catalog sales introduced sales-from-afar to the masses. Yet the the Internet has created a new economic climate which merits a new approach, Gateway
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Chairman and Chief Executive Officer Ted Waitt, told CBS.MarketWatch.com.

Waitt, who is one of the commission's 19 members, said the state tax system -- which involves 45 U.S. states that apply sales tax -- isn't a good system. "The state sales tax system is a mess. It's unfair, it's discriminatory," he said.

As for the application of e-commerce taxation, Waitt was clear: "We don't care as long as it's fair, as long it's not discriminatory." He added, "Saying 'Don't tax the Internet' sounds really good but is that practical?"

Nilesh Shah, of KPMG's e-commerce tax practice, said much of the resistance to e-commerce taxation on a state level is based around the fear that much-needed tax revenue will be lost. In this case, he said that the revenue-robbing specter of catalog sales has failed to materialize over the past 50 years.

"We have states that are literally worried that the sky is falling. Well, it's not. Most states have surpluses today," said Shah.

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